In October, markets brushed off the sell-off that began in the summer. The S&P 500 (SPY) fell from over 4,300 to below 3,600. It proceeded to rally through December.
Markets believed in an illusion that interest rates will back down. On Dec. 14, The Federal Reserve crushed that distant hope. It cited strong job numbers against a forecast of 0.5% GDP growth in 2023.
The Fed believes it may continue using monetary policy tools to control inflation. Unfortunately, the Fed is counting over a million jobs created since Spring. Economists likely overstated the real job additions. Part-time jobs are outpacing full-time job growth. People take multiple jobs to cover their expenses.
The central bank’s potentially incorrect counting of jobs will mean higher interest rates in 2023. Chances are growing that the S&P 500 will retest the sub-3,600 lows set in 2022.
Bears cannot safely buy puts or short-sell the market. The U.S. government could post a sharp drop in inflation. This would cause markets to speculate on a rate hike pause again.
Investors should accumulate cash levels to collect interest payments. Build only small positions in ETFs like SPY and the S&P/TSX 60 Index (XIU).
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